Microsoft (MSFT) and LinkedIn (LNKD)

Before the open in New York yesterday, MSFT and LNKD announced that the latter has agreed to be acquired by the former in a friendly all-cash deal for $26.2 billion, or $196 per LNKD share.  Satya Nadella, the MSFT chairman, describes the merger as the coming together of the professional cloud with professional networking.  The acquisition price, a 50% premium to where LNKD was trading beofe the announcement, represents a bit less than 7% of MSFT’s market capitalization.

The most interesting aspect of the deal is that MSFT shares only fell by 2.6% in trading yesterday, in a market that declined by 0.8%.  To me this is indicative of the tremendous positive mindset change that has happened by investors about MSFT since the end of the disastrous Steve Ballmer era.



Tobin’s q and LinkedIn (LNKD)

James Tobin was a Nobel Prize-winning economics professor at Yale.  One of the things he’s famous for is his formulation of the “q” ratio, which is:   total market value of a publicly traded company’s outstanding stock ÷ the replacement value of the company’s net assets.

Sometimes q is taken to mean:  per share stock price ÷ book value per share.  But that’s not right.  A company may have a brand name or powerful distribution network that don’t show up in book value (Warren Buffett’s key investment insight).  Or it may have potentially lucrative mineral leases that appear on the books only as raw land, because they haven’t been fully explored.  Or, in today’s world, a firm may have created big software research/development assets whose only effect on accounting values comes from the subtraction of associated salaries from earnings.

Tobin understood that sometimes a company has assets that are hidden from public view.  As a result, a company’s true q is likely best known–or solely known–to its top management.

Tobin’s advice to managers is this:  if your company q > 1, meaning the stock is worth more than the value of the company’s assets, sell stock.  If your q < 1, buy stock back in.  Never do the reverse.

There’s a certain paradox to q.  If, out of the blue, a company launches a stock offering whose proceeds will find no obvious near-term use, then top management, which knows the firm the best, must think the present q is a lot bigger than 1.  If so, no rational person should want to buy the shares being offered.

…which brings us to LNKD, which has recently announced a $1 billion stock offering.  Year-to-date, the stock is up 123% vs, an 18% gain for the S&P.  The trailing PE, which is probably not relevant, is 730x.

My guess is that the offering will be heavily oversubscribed, despite the implicit warning that the offering itself entails.

It will be interesting to see how LNKD shares fare over the coming months.

“LinkedIn Scammed”–what were you thinking, Joe?

“Was LinkedIn Scammed?”

A friend who’s a regular reader asked for my comments on the LinkedIn article that reporter Joe Nocera wrote for the op-ed page of the New York Times last Friday. (See my post describing the offering.)

Nocera’s comments about LinkedIn

The article makes two assertions:

–underwriters Merrill Lynch and Morgan Stanley (I don’t know why JP Morgan, listed as a first-rank underwriter on the prospectus, isn’t included)  “scammed” LKND–which is an NYSE stock, by the way, despite the four-letter ticker symbol.  They deliberately priced the IPO too low, he says, in order to shift tens, maybe hundreds, of millions of dollars out of the pockets of LKND and into those of favored clients.

–this damaged LKND, for whom the money left on the table may one day be the difference between success and Chapter 11.

Wow!!  Strong stuff.  What’s the evidence?  I can’t see much.

my thoughts


Of course, anything’s possible.  And I think it’s clear that the sell side’s primary loyalty is to its largest brokerage customers, not to one-time investment banking clients.  But the acknowledgement of status involved in dispensing and receiving a large allocation of a “hot” IPO is, to my mind, far more important to the broker-client relationship than whether the price is $45 a share or $65.  For large clients, the money difference is a rounding error in their performance calculations.

In addition, I don’t see why an industry so deeply distrusted by most Americans and under continuing scrutiny from Washington would take the chance of deliberately mispricing an offering–especially when campaigning for the next election has already begun.  Also, why jeopardize your chances of being in the running to manage the really big social networking IPOs, like Facebook or Groupon?

the example of Renren (RENN, also a NYSE stock)

LKND followed close on the heels of RENN, a Chinese social networking stock that came public on May 4th.  RENN was priced at $14.  It opened at $19.50, quickly reached a high of $24 and closed that day at $18.01.  But by the time LKND was being priced, RENN had fallen below its IPO price–the last thing any party to a public offering wants to see.

RENN had to be an argument for more cautious pricing of LNKD.   It suggests, as well, the jury is still out on whether LNKD should have been priced more aggressively than it was.

the LNKD valuation

LKND earned $.17 a share last year.  At the initial suggestion of a $32 offering price, that would have been a PE of 188x.  At $45, the actual IPO price, the multiple is 265x.  Is Mr. Nocera actually saying the stock should have been priced at 350x earnings?

is LNKD hurt financially by an IPO price of $45, instead of, say, $60?

an opportunity loss of $90 million?

In one sense, yes, because at $60 a share, LNKD would have taken in $340 million or so instead of $250 million.  But at $60 the risk of a failed IPO would have been higher.  Remember, too, that LNKD wasn’t exactly a babe in the woods.  It had a list of professional investors who were already shareholders that it could call on for advice.  Goldman was the only one to take the money and run, but still…

Use of Proceeds

There’s a section of any prospectus called “Use of Proceeds.”  When I looked at this section of the LNKD document, I almost started to laugh.  I’ve never seen a company struggle so much to explain what they’re going to do with the money.  Here’s a sample:

“The principal purposes of this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our Class A common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us of this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes…”

In other words, LNKD can’t imagine how it will spend the money.  By the way, the company already had over $100 million on the balance sheet on March 31st and had just started to generate enough cash flow to cover all its expenses.

employee stock options gain $1 billion+ in value

What LNKD really needed was a way for its 990 employees to cash in the tons of stock options LNKD has issued to them (page F-24 of the prospectus tells us that there are 16+ million of them, with a weighted-average exercise price of $5.86).  That works out to over $1 million apiece–a billion dollars in compensation that LNKD doesn’t have to come up with itself.

lapses in logic

Mr. Nocera asserts that the investment bankers “with their fingers on the pulse of the market, absolutely must have known” that LNKD would double on the first day.  He forgets to mention that the only investment bank among the insiders, Goldman, cashed out completely at $45.

He starts out the article by saying that during the past decade investment banks routinely tricked their institutional clients into buying dud securities at wildly high prices.  He then uses this as support for the assertion that Morgan Stanley and Merrill are now doing the opposite.  Huh?

Mr. Nocera cites two “authorities” in support of his contentions.  Both are web postings.

One is by an employee of social games maker Zynga.

The other is by Henry Blodget, the former Merrill internet analyst who is barred from the investment industry for having lied, in glowingly positive reports, about his negative investment opinion for companies under his coverage.     Maybe Bernie Madoff was unavailable.

All in all, not your best day, Joe.